The changes to excess concessional contributions from 1 July 2013 have certainly been a popular outcome for both professionals and individuals who have endured ECT breaches due to the ever-changing contribution caps.
As is typically the case, legislative change opens new strategy doors, or in some instances, re-opens once popular strategies. This is certainly the case with the much talked about anti-detriment reserving strategy within SMSFs, which in recent years has been hamstrung by reserve allocation issues and excess contributions tax. With excess concessional amounts now included within an individual’s assessable income, this anti-detriment strategy in my view appears to have been reborn, in particular where the deceased member has little or no assessable income (e.g. post 60 and drawing an account based pension).
Let’s take a look at the following example:
Tony (62) dies with the death benefit to be paid from his SMSF member account to his adult children, Toby and Kate (both non-dependant beneficiaries). The death benefit to be paid of $500,000 is made up of:
- $300,000 taxable component; and
- $200,000 tax-free component
Both children are members of the SMSF and wish to continue with the fund. As a result, it was previously resolves to create a reserve for the purposes of paying a future anti-detriment amount, with a separate investment strategy also formulated. This reserve has built up over time through the application of applying fund investment earnings to the reserve.
The trustees have calculated a tax saving amount of $46,000 to ‘top up’ the death benefit and apply this amount from the reserve to pay the lump sum. The death benefit has now increased to $546,000, payable to the beneficiaries in accordance with Tony’s death benefit nomination. As a result of the anti-detriment payment, this entitles the SMSF to claim a tax deduction for the current financial year of $306,667.
As the allocation from reserve was credited solely to Tony (and was also more than 5% of his interest at the time of allocation), the entire amount credited from anti-detriment reserve will count as a concessional contribution for Tony. This creates an $11,000, excess concessional contribution (i.e. $46k – $35k cap).
As a result of the ECT reforms for concessional contributions from 1 July 2013, this excess amount will now form part of Tony’s assessable income (and be subject to an excess concessional contribution charge and shortfall interest amount). However, as Tony has little or no other income, the amount has no tax impact on his personal circumstances and would not require a personal tax return to be lodged (due to pension income being non-assessable).
The previous penalty tax for excess concessional contributions and the ATO’s position on reserve transfers to pay death benefits, certainly limited the effectiveness of using reserves. However, these new measures appear to now bring back into play the ability to fund anti-detriment amounts through reserves, subject to the deceased individual’s own personal tax circumstances.
As always, I’d be interested in any feedback and comments…